Chapter 1 HW - Valerie Bodden K. (10-0014) Financial...

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Valerie Bodden K. (10-0014) Financial Markets and Institutions (UNIBE) Professor Bairan September 8, 2011 Chapter 1 Review Questions 1) What is the difference between a financial asset and a tangible asset? The difference between a tangible asset and a financial asset is that a tangible asset is basically one whose value depends on a physical property, while a financial asset, considered an intangible asset, represents a legal claim of some future benefits or cash flows. 2) What is the difference between the claim of a debt holder of general Motors and an equity holder of General Motors? When a debt holder establishes a claim, he establishes it by contract that specifies the amount and timing of periodic payment in the form of interest, as well as the maturity. The debt holder plays the part of an creditor. In the case of a default he would have a prior claim on firm assets over the equity-holder. The equity holder has a Residencial claim to assets and income. 3) What is the basic principle in determining the cash flow of a financial asset? The present value of the expected cash flow is the price of any financial asset. The basic variables when determining the price of an asset are: expected cash flows, timing of cash flows and discount rates. 4) Why is it difficult to determine the cash flow of a financial asset? It is difficult to determine the cash flow of a financial asset because of several accounting measures, the existing possibility of default of the issuer, and the embedded options in the security. 5) Why are the characteristics of an issuer important in determining the price of a financial asset?
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The characteristics of an issuer are important when determining the price of a financial asset because they determine the issuer’s creditworthiness and they have an impact on the required rate of return for that asset. 6) What are the two principal roles of financial assets?
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This note was uploaded on 09/12/2011 for the course FINANACE -- taught by Professor Bairan during the Spring '11 term at Universidad Iberoamericana.

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Chapter 1 HW - Valerie Bodden K. (10-0014) Financial...

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